2014 (11) TMI 129 - AT - Income Tax

Tribunal Rules in Favor of Assessee on Transfer Pricing and Section 10AA Deduction Dispute

M/s. Parexel International (India) Private Limited Versus Asst. Commissioner of Income-tax

The Tribunal allowed the assessee's appeal by excluding the contested comparables, leading to no Transfer Pricing adjustment. The Revenue's appeal ... Determination of ALP – Selection of comparables - Accentia Technologies Limited – Functionally different unit - Held that:- Assessee is basically providing various services to the customers of its AEs in relation to human resources which are more or less centered around the employees of the prospective clients - they are providing full range of geospatial services to its customers - the mere fact that two services are placed under this category do not become automatically comparable - If a case providing one category of services under ITES is claimed as comparable with another in the category of service under ITES as per this circular, then it must be shown ex facie that it is broadly similar - there is a vast difference which make one quite distinct from the other - this company cannot be treated as comparable – Decided in favour of assessee. Cosmic Global Ltd. – Held that:- Following the decision in Mercer Consulting (India) Pvt. Ltd. Versus DCIT, Circle-2, Gurgaon [2014 (7) TMI 715 - ITAT DELHI] - The entire outsourcing is confined to Translation charges paid at ₹ 3.00 crore, which is strictly in the realm of the Translation segment, revenues from which are to the tune of ₹ 6.99 crore - If this segment of Translation is not under consideration for deciding as to whether this case is comparable or not, we cannot take recourse to the figures which are relevant for segments other than accounts BPO - a captive unit cannot be compared with a giant case and thus excluded CG-VAK with turnover from Accounts BPO segment at ₹ 86.10 lacs - As the segmental revenue of BPO segment of Cosmic Global Limited at ₹ 27.76 lac is still on much lower side - M/s. Cosmic Global Limited cannot be considered as comparable with the assessee-company. Eclerx Services Ltd. – Genesys International Ltd. - Held that:- The assessee company is engaged in the business of providing IT enabled services to its group concerns, such as operationalising the case-report form in the computer system, and undertaking quality control tests of the images sent by the AEs – the company is basically providing data management and data processing services which are in the nature of low end services, and cannot be considered as functionally different for the purpose of comparability analysis - the AO is directed to exclude Eclerx Services P. Ltd. from the list of comparables, it being a functionally different company. The Arithmetic mean of margins of the remaining seven comparables comes to 11.85%, as pointed out by the assessee, on the basis of working furnished by him – it is being lower than the profit margin of 15.57% charged by the assessee company to its AE in the relevant international transactions, it follows that no TP adjustment is required to be made in the case of the assessee – the addition made by the AO to total income of the assessee by way of TP adjustment is not allowed – Decided in favour of assessee. Computation of deduction u/s 10A - Inclusion/exclusion of the communication costs from the total turnover – Held that:- Following the decision in The Commissioner of Income Tax Versus M/s. Gem Plus Jewellery India Ltd. [2010 (6) TMI 65 - BOMBAY HIGH COURT] - wherein it was held that although the expression ‘total turnover’ has not been defined at all by the Parliament for the purposes of S.10A, when the definition of ‘export turnover’ excludes specifically certain items, the expression ‘total turnover’ cannot have a different meaning than the total turnover especially when the export turnover forms a constituent part of the total turnover for the purpose of the application of the formula - any item which is excluded for the purpose of computing export turnover has necessarily to be excluded for computing the total turnover for the purpose of computing deduction u/s 10A of the Act – Decided against revenue. Issues Involved:1. Determination of Arm's Length Price (ALP) for IT enabled services.2. Selection of comparables for Transfer Pricing (TP) analysis.3. Computation of deduction under Section 10AA.4. Inclusion/exclusion of communication costs from total turnover for deduction computation.Detailed Analysis:1. Determination of Arm's Length Price (ALP) for IT enabled services:The assessee, a company providing IT enabled services to its Associated Enterprises (AEs), reported a total income of Rs. 3,66,153 after claiming a deduction of Rs. 4,86,25,156 under Section 10AA. The Assessing Officer (AO) found that the assessee charged Rs. 28,90,32,391 for services to its AEs. To determine the ALP, the AO referred the case to the Transfer Pricing Officer (TPO) under Section 92CA(1). The TPO, after analyzing the transactions and comparables, selected 12 companies with an Arithmetic Mean margin of 27.42%. After adjustments, the ALP was determined to be Rs. 31,54,74,618, resulting in a TP adjustment of Rs. 2,40,85,665.2. Selection of comparables for Transfer Pricing (TP) analysis:The assessee objected to the comparables selected by the TPO, particularly five companies: Accentia Technologies Limited, Cosmic Global Ltd., Eclerx Services Ltd., Genesys International Ltd., and Infosys BPO Ltd.- Accentia Technologies Limited: Excluded due to mergers and acquisitions impacting profit margins, as per Tribunal decisions in similar cases.- Cosmic Global Ltd.: Excluded due to substantial outsourcing (57% of total operating costs) and low segmental revenue from Accounts BPO.- Eclerx Services Ltd.: Excluded for being functionally different and involved in diverse services without segmental data.- Genesys International Ltd.: Excluded due to functional incomparability, providing geospatial services distinct from the assessee's IT enabled services.- Infosys BPO Ltd.: Excluded due to its uncomparable size and higher turnover, following the Delhi High Court's decision in CIT V/s. Agnity Technologies Pvt. Ltd.With these exclusions, the Arithmetic mean of the remaining seven comparables was 11.85%, lower than the assessee's profit margin of 15.57%, indicating no TP adjustment was required.3. Computation of deduction under Section 10AA:The AO initially reduced the communication costs from the total turnover while computing the deduction under Section 10AA, resulting in a lower allowable deduction. However, the Dispute Resolution Panel (DRP) directed the AO to reduce the communication costs from both export turnover and total turnover, relying on the Bombay High Court's decision in Gem Plus Jewellery India Ltd. Consequently, the assessee's entire claim for deduction under Section 10AA was allowed.4. Inclusion/exclusion of communication costs from total turnover for deduction computation:The Revenue's appeal contested the inclusion/exclusion of communication costs from the total turnover while computing the deduction under Section 10AA. The Tribunal upheld the DRP's decision, following the Bombay High Court's ruling that items excluded from export turnover should also be excluded from total turnover for deduction purposes. Hence, the Revenue's appeal was dismissed.Conclusion:The Tribunal allowed the assessee's appeal by excluding the five contested comparables, resulting in no TP adjustment. The Revenue's appeal regarding the inclusion/exclusion of communication costs was dismissed, affirming the DRP's direction to exclude such costs from both export and total turnover for Section 10AA deduction computation.